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STRATEGY & COMPETITIVE ADVANTAGE

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Business PropositionBusiness Proposition

Profits = Quantity (Revenue - Cost)

3 most fundamental variables in Business

MARGIN

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Definition Definition

The determination of the long run goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals

• Alfred Chandler, Strategy and Structure

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Levels of StrategyLevels of Strategy

Corporate strategy... defines the scope of the business in terms of the industries and markets in which it competes.– includes decisions about diversification, vertical integration,

acquisitions, new ventures, divestments, allocation of scarce resources between business units

Business strategy... is concerned with how the firm competes within a particular industry or market... to win a business unit must adopt a strategy that establishes a competitive advantage over its rivals.

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Domain of Strategy Domain of Strategy

strategic competitiveness and above normal returns

concerns managerial decisions and actions which materially affect the success and survival of business enterprises

involves the judgment necessary to strategically position a business and its resources so as to maximize long-term profits in the face of irreducible uncertainty and aggressive competition

strategy is the linkage between a business and its current and future environment

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Concepts of Firm Performance

Concepts of Firm Performance

firm survivalaccounting profits (ROA, ROE, ROS)

– surplus of revenues over expenses

economic profit/rent (economic value added, positive NPV)

– normal return on capital – abnormal return - surplus after all inputs

shareholder value/market value…(EVA, Tobin’s q)

– Change in market value over time

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Common Elements in Successful Strategy

Successful Strategy

Profound understanding of the competitive environment

Objective appraisal of resources

Long-term, simple and agreed uponobjectives

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EFFECTIVE IMPLEMENTATION

Source: Adapted from Robert S. Grant, 1991

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Above Normal Profits

(in Excess of the Competitive Level)

AvoidCompetitors

Be Better ThanCompetition

AttractiveIndustry

AttractiveNiche Cost

AdvantageDifferentiation

Advantage

AttractiveStrategic

Group

Entry Barriers

Mobility Barriers

Isolating Mechanisms

Sources of Superior PerformanceSources of Superior Performance

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Types of Competitive Advantage

Low CostDifferentiation

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Sources of Competitive Advantage Theoretical Frameworks

The Industrial Organization ViewThe Resource-based ViewRelationship between these two views

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The Emergence of Competitive Advantage

External Sources of Change(fast food, cars, oil)Responsiveness to Change (soft drink, retail)Innovation (book-selling, video games)

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Sustaining Competitive Advantage

Causal Ambiguity and Uncertain ImitabilityIsolating Mechanisms

-first mover advantage -deterrence and preemption

-resource constraints-dynamic capabilities